After Deep Slump, Nascent Recovery for Ireland

Ireland's economy is stabilizing, growth expected to resume this year

Export sector driving nascent recovery

Continued fiscal consolidation will be necessary to maintain confidence

The Irish authorities were among the first in Europe to undertake serious fiscal consolidation, with the introduction of an income levy and sizeable cuts to public sector pay and social welfare benefits. This early action helped restore confidence, and a strong export performance has lifted growth prospects. But unemployment remains high at more than 13 percent of the labor force, and the country’s openness makes it vulnerable to the instability that has gripped financial markets in recent months.

Although the economy could grow again this year, a return to the high growth rates that earned Ireland the nick name of “Celtic Tiger” is unlikely, with the IMF expecting GDP growth to increase gradually to about 3.5 percent in 2015.

Every year, the IMF conducts reviews of its member countries’ economies. The analysis is subsequently discussed by the IMF’s 24-member Executive Board.

In this interview, Ashoka Mody, IMF mission chief for Ireland, speaks about the nascent recovery and the many challenges that still lie ahead.

IMF Survey online: Ireland took swift action to return the budget to solvency. But has it been worth it, given the severe downturn of the economy?

Mody: If the government had failed to take action, the budget deficit would have been much larger and the borrowing requirements would have started going up even faster. That would have put the country in a difficult position over the medium term.

Because the consolidation had to occur during a recession, it has inevitably dampened short-term growth prospects. But that needs to be traded off with the longer term confidence-building that is very much a goal of this consolidation process. To the extent that the Irish authorities can now legitimately claim broader policy credibility, some of that confidence-building is already occurring, offsetting, in part, the short-term contractionary effects on the economy.

IMF Survey online: How vulnerable is the economy to contagion from the European sovereign debt concerns?

Mody: Ireland is in the group of so-called “peripheral” economies that have been the focus of sovereign debt concerns in recent months. Irish sovereign spreads have risen along with spreads in these other economies. However, within this group, the Irish economy has been relatively...